Consumers Price Index

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Abstract

The CPI measures the rate of price change of goods and services purchased by New Zealand households.

Purpose

The consumers price index (CPI) measures the changing price of a fixed basket of goods and services purchased by New Zealand households. The aim of the CPI is to measure price changes of the same sample of products at each outlet over time. When there is
a change in the size or quality of any of the goods or services in the basket, an adjustment is made to ensure that the price change shown in the CPI is not affected by the change in size or quality.

The CPI is used to help set monetary policy and for monitoring economic performance. It is used by the government to adjust New Zealand Superannuation and unemployment benefit payments once a year, to help ensure that these payments maintain their purchasing
power. Employers and employees use the CPI in wage negotiations.

The CPI is published quarterly.

The food group is the only CPI group for which an index is published each month. This is known as the Food Price Index.

CPI Review Papers

Usage and limitations of the data

The CPI is a measure of price change for private New Zealand households only. It should not be used or interpreted as an inflation measure for the economy as a whole.

Significant events impacting this study series

There have been three distinct phases in the historical development of retail/consumers price indexes in New Zealand. The first phase up to the end of World War II shows early developments and refinements in retail price indexes. The second phase began in 1948 with the first government-appointed committee making detailed recommendations for a revision, a practice that has continued at regular intervals since. The beginning of the third phase in 1974 saw a significant change in direction with respect to weighting. The consumption approach, which had been used up to that time, was no longer considered appropriate and was replaced by an expenditure-based system for which significantly more accurate data was available. Up to 1983 this expenditure-based system was revised at three-yearly intervals with alternating major and minor revisions. The cycle was broken when the major review scheduled to take place in 1986 was deferred due to the introduction of the Goods and Services Tax (GST). That review was carried out in 1988.

A summary of the major points from each major review follows. For more information on the history of the CPI, refer to the paper Calculation and Structure of the CPI that was prepared for the 1997 CPI Revision Advisory Committee (RAC).

1.1 Retail price indexes up to the end of World War II

The earliest official and systematic investigation of retail prices in New Zealand began in 1914 and was published in the Report on Cost of Living, 1891-1914.

Retrospective collection of price data was carried out in Auckland, Wellington, Christchurch, and Dunedin, each of which was given equal weight.

The commodity groups covered were food, housing (rent), and fuel and light.

The resulting index series was based on average annual aggregate expenditures for the four centres for the period 1909 to 1913 and calculated using the Laspeyres formulae.

From 1914, the coverage of price surveys was extended to 25 urban areas for commodities in the original groups, and population weights were introduced.

The effect of wartime conditions and pressure for wage arbitration prompted further expansion of price collections in 1918.

In 1924, the clothing and miscellaneous groups were incorporated into the index, and the publication of a quarterly all groups index commenced.

The index was revised in 1930 and the weighting pattern thoroughly reviewed.

During World War II, the Department of Statistics continued to survey the prices of all commodities covered by the 1926-30-based index.

After the war this data was used to calculate revised index numbers for the years 1942 to 1949, during which period only a Wartime Price Index had been published.

A method of adjusting for seasonal variations was introduced at this stage.

1.2 Post-war revisions of the CPI to 1974

The 1948 review

The first RAC was appointed by the Government in 1948 to review the compilation of the index and identify the various theoretical concepts to be used.

The regimen was no longer limited to essential commodities but was designed to cover “the whole range of commodities and services used in the average household — with representation as far as possible, of the amenities of modern living”.

The housing group incorporated the rentals of furnished properties, the cost of owner-occupied housing and rentals of unfurnished housing. A user-cost approach was adopted for owner-occupied housing.

To improve the accuracy of price quotations and initiate quality control procedures, the Department of Statistics appointed its own team of field staff.

The weighting pattern of the new index was derived from quantities based primarily on the latest available statistics of production, exports, imports, and manufacturing inputs.

The 1955 review

Urban areas in which prices were surveyed were reduced to 21 and individual index numbers were published for each.

Direct estimates of consumption based on retail sales began to be used in the derivation of the weighting pattern.

Fewer commodities were excluded on the grounds of luxury status, resulting in a net increase in the number of regularly priced items.

Important changes were made in the treatment of seasonal items (fruit, vegetables and eggs), in the housing area, and for measuring the movements in transport charges.

The 1965 review

The CPI continued to be subdivided into six groups and 15 subgroups.

Index numbers were calculated for 14 individual centres (but prices were collected in 25 centres), comprising the four main centres and 10 other larger centres. Series were also produced for North and South Island groupings of the smaller centres.

1.3 Reviews of the CPI from 1974

The 1974 review

A fundamental conceptual change was made to the CPI at the time of the 1974 review from the consumption-based approach to an expenditure-based approach.

The 1977 review

During this minor review attention was focused on updating the expenditure pattern of the index and incorporating up-to-date population weights for the urban areas in which price surveys were conducted.

The 1980 review

A major change was made in the derivation of the overall weight for the purchase and construction of dwellings. In the 1974 and 1977 reviews the weighting calculation incorporated the expenditure of households either acquiring a dwelling, or selling a dwelling and buying a replacement (In this second case, the net cost — ie the difference in price between the sale and the purchase — was used in the calculations). The 1980 review incorporated the net proceeds of all sales made by households, including those who sold dwellings and did not make a corresponding purchase. This change was in accordance with the recommendations of the 1978 RAC and contributed to a considerable fall in the weights given to the direct costs of purchase and construction of new dwellings.

The 1983 review

Commodity expenditure and population weights were updated during the 1983 minor review.

Improvements were made to price survey procedures for insurance, health care, accommodation and entertainment admissions.

The 1988 review

The 1988 review was originally scheduled for 1986, but due to the introduction of GST, the 1985 RAC recommended that it be postponed until Household Economic and Income Survey (HEIS) data free from the effects of the pre-GST spending boom became available.

Because of the deregulation of the economy initiated in 1984, new or expanded price surveys were introduced for a range of commodities and services.

The index regimen was also restructured for the first time since 1974. The new structure disaggregated the regimen into more useful and homogeneous commodity groupings. The former miscellaneous group was divided into tobacco products and alcoholic drinks; personal and health care; recreation, education, and generalised credit.

The number of centres that were price surveyed was reduced to 20.

In 1991 the number of centres that were price surveyed was further reduced from 20 to 15.

The first Reserve Bank Policy Targets Agreement (PTA) was signed in 1990. The Reserve Bank was required to achieve and maintain price stability with 0 to 2 percent annual underlying inflation as a target by December 1992. For the PTA, inflation was to be measured by the CPI less the effect of changes in interest rates, some government charges, and international commodity price shocks.

The 1993 review

Credit was viewed as a service in its own right and a major structural change was made to the regimen with the introduction of a separate credit services group.

Following a recommendation from the 1991 RAC, the price indicator for dwellings was adjusted to represent the price movements of new dwellings only.

Postal survey questionnaires were extensively redesigned and outlet samples were also reviewed and updated where necessary.

A selection of small towns were also surveyed to determine whether their price movements differed significantly from those in the 15 price-surveyed urban areas.

The seasonal adjustment process for fresh fruit and vegetables index was revised, with seasonal factors being updated annually. Fixed weights were introduced for fresh fruit and vegetables, replacing the system of variable weights which had previously been used.

Between the 1993 and 1999 reviews

After the 1993 review, Statistics NZ developed a new index calculation system that incorporates the price relatives formula, a variant of the Laspeyres index.

In 1995, a research index for superannuitant households was first published.

Item weights and prices of some items within the CPI are now reviewed annually. The first of these reviews was completed in the June 1996 quarter. Any changes to expenditure weights are presently generally performed below the published regimen level.

The 1999 review

Interest and residential section prices were removed from the CPI all groups.

Introduction of the use of hedonic regression quality adjustment of used cars and fridge-freezers prices.

The inclusion of charges for bank account maintenance, bank transactions, and other bank fees into the ‘credit services’ group in the index.

The 2006 review

The 2006 review was informed by the 2004 Revision Advisory Committee on the CPI. See below for the 20 Recommendations made by the 2004 RAC, and the progress towards these.

The 2006 CPI review encompassed a number of aspects, detailed below.

The basket of representative goods and services was been reselected and reweighted, using information from the 2003/04 Household Economic Survey (HES) and other sources. The sample of retail outlets from which prices are collected has been reselected for the first time since the 1999 review. Item specifications have been updated and the sample of product sizes, brands and varieties has been reselected. While the sample of 15 regional centres is remaining unchanged, price collection effort is being redistributed more towards the larger cities.

A new expenditure classification was adopted; the New Zealand Household Expenditure Classification (NZHEC). The new classification is based on the international standard Classification of Individual Consumption According to Purpose (COICOP) and has been adapted to suit New Zealand conditions. Index time series based on the new classification have been recast from the June 1999 quarter up to the June 2006 quarter.

The geometric means (or Jevons) formula will be used in the reweighted index to calculate elementary aggregate indexes for goods and services that are considered to be subject to outlet substitution. The Jevons formula, which is recommended by the International Labour Office (ILO), implicitly assumes that consumers increasingly favour outlets showing lower relative price change, whereas the formula used in the current CPI, the ratio of arithmetic mean prices (or Dutot), assumes that consumers do not substitute between outlets.

The CPI All groups index ceased to include prices that were seasonally adjusted. Until the 2006 review, fresh fruit and vegetable prices were seasonally adjusted, while the prices of other goods and services known to exhibit seasonality (such as international airfares and holiday accommodation) were not adjusted. This change was recommended by the CPI Revision Advisory Committee.

The range of regional indexes that are routinely published was reduced from the 15 regional centres to five broad regions based on regional council areas (Auckland, Wellington, Rest of North Island, Canterbury, and Rest of South Island). The regional indexes currently being published are not considered fit for purpose, as they make use of national movements, where regional variation is possible, for about 30 percent of the basket (based on expenditure weight). National movements, where regional variation is possible, are currently being used for such important goods and services as construction of new dwellings, dwelling rentals and used cars. Indexes for the five broad regions will make use of price movements that correspond to the respective broad regions for construction of new dwellings, dwelling rentals, and used cars.

For the first time during a periodic CPI review, substantial use was made of retail transaction data, obtained from the Nielsen Company in New Zealand and GfK in Australia. The Nielsen Company collects details of sales of barcoded products that are scanned at checkout counters in supermarkets up and down the country. GfK collects similar information for a range of small and large appliances sold through most of New Zealand’s main appliance retailers and department stores. The information has been used to help determine the expenditure weights of some goods in the CPI basket, to select representative product sizes and varieties to survey, and to ensure that the mix of brands in the CPI price samples reflects market shares.

Some changes to the methods used in estimating CPI weights mean that the weights are not strictly comparable with those used in 2002. Weights published are expenditure weight shares, and changes in expenditure shares do not necessarily imply similar changes in actual levels of expenditure. Users interested in changes in consumer expenditure are referred to the HES or estimates of household consumption expenditure from the national accounts.

The 2008 review

A review of the Consumers Price Index (CPI) was implemented when the September 2008 quarter index was released on 21 October 2008. The review encompassed reselecting and reweighting the basket of representative goods and services, to ensure the basket continues to reflect household spending patterns.

The basket of representative goods and services was reselected and reweighted, using information from the 2006/07 Household Economic Survey (HES) and other sources.

The impact of GST rise on the CPI

GST rose from 12.5 percent to 15 percent on 1 October 2010. However, the rise in GST was not immediately reflected in the prices of some seasonally available goods and services in the CPI basket. The rise was reflected when prices for these items were next collected. These items make up about 3 percent of expenditure on goods and services in the CPI. Of this 3 percent, nearly half was reflected in the March 2011 quarter CPI, nearly half in the June 2011 quarter, and the remainder was shown in the September 2011 quarter.

The table below shows what the quarterly and annual percentage changes would have been if prices collected for the December 2010, and March, June, and September 2011 quarters had been processed with GST of 12.5 percent for goods and services that are subject to GST. The CPI would have risen 0.4 percent in the September 2011 quarter, and 2.5 percent for the year to the September 2011 quarter.

The impact of the Christchurch earthquake on CPI price collection

There was no material impact on CPI movements from the Christchurch earthquakes in 2010 and 2011.

For goods and services prices collected quarterly from shops in February 2011, collection was completed in all regions before the earthquake. In March, food (and non-food grocery) prices were not collected by Statistics NZ staff in Christchurch city. For Christchurch, price movements for the rest of New Zealand were used to calculate the March 2011 food price index, which represents one-third of the food group in the March 2011 quarter CPI. This approach was also taken for non-food grocery prices for the March month.

For goods and services prices collected quarterly by postal survey (and posted in early February 2011), there were lower-than-usual response rates for Canterbury respondents. The overall response rate for quarterly postal surveys was about 96 percent, compared with about 98 percent over the previous eight quarters. For most parts of the basket, the usual treatment for missing prices in the current quarter is to use the last reported price. With the lower response rate in the March 2011 quarter, there was the potential for the higher level of non-response to slightly flatten the quarterly movement. Therefore, price movements for responding businesses were used to bring the Christchurch response rate up to its usual level.
Statistics NZ began collecting prices again in Christchurch in April 2011.

For goods and services prices collected quarterly from shops for the June 2011 quarter, collection was completed in May. While the June monthly collection of food and non-food grocery prices was put on hold for the remainder of the week following the Monday 13 June earthquakes, pricing was completed on Monday 20 and Tuesday 21 June.

For goods and services prices collected quarterly by postal survey (and posted in early May), the overall response rate for quarterly postal surveys was about 98 percent, which compares well with previous quarters.

By November 2011, when quarterly collection was undertaken, almost all outlets that had not been replaced had reopened.

The 2011 review

A review of the consumers price index (CPI) was implemented when the September 2011 quarter index was released on 25 October 2011. The review encompassed reselecting and reviewing the basket of representative goods and services, to ensure the basket continues to reflect household spending patterns.

The basket of representative goods and services was reselected and reweighted, using information from the 2009/10 Household Economic Survey (HES) and other sources.

CPI rolling review of retail outlets

Statistics NZ has begun a continuing, rolling review of retail outlets visited for the consumers price index (CPI). These retail outlets are those from which prices are collected by Statistics NZ price collectors.

The review will consider:

the retail outlets visited by Statistics NZ price collectors

the detailed pricing specifications of products for the representative goods and services (items) that are tracked for the CPI at retail outlets.

The first changes were implemented when the September 2012 quarter index was released in October 2012. Further changes have been incorporated in subsequent quarterly releases.

Outlet samples are being refreshed to ensure the outlets visited reflect where consumers shop. The review will analyse the coverage of retailers and the mix of store-types for each item.

The review will ensure that the detailed pricing specifications used to select individual products to track for the CPI are fit-for-purpose and that a representative selection of products is priced for each CPI item. We are making use of information from the 2009/10 Household Economic Survey (HES), the Annual Enterprise Survey (AES), Statistics NZ's register of businesses (the Business Frame), and other sources including scanner data obtained from the Nielsen Company.

The CPI retail outlet samples were last reviewed as part of the 2006 CPI review.

CPI items tracked at retail outlets have been organised into eight review groups. The outlets visited and the item pricing specifications will be reviewed for one group each quarter.

For the first review group, we looked at outlets visited for clothing, footwear, and furniture items. Around 30 of 670 retail outlets tracked for this group were replaced. The outlets visited for clothing items have been re-allocated to cover a wider range of retailers (particularly specialist and boutique clothing stores) and give greater coverage of clothing sales at sports and camping stores. Changes made to the furniture outlets were to give increased representation of new furniture retailers and those that have increased in significance since the last CPI retail outlet review.

The eight review groups are:

clothing, footwear, and furniture

services, vehicles, and personal goods

sports and stationery

consumer electronics (annual review)

convenience stores

supermarkets: food

supermarkets: non-food

consumer electronics (annual review).

2013 CPI Advisory Committee

Statistics NZ convened a CPI advisory committee in May 2013 to undertake an independent review of the methods and practices used to compile the CPI, and to advise the Government Statistician on the CPI.

The committee's recommendations will inform the next three-yearly CPI review, which will be implemented when the September 2014 quarter CPI is released in October 2014.

The 2014 Review

CPI review implemented
Changes from our latest CPI review have been implemented in this release. The review
reselected the basket of goods and services, and updated their relative importance. The CPI is
reviewed every three years to ensure it maintains its relevance.

Fifteen items were added to the basket, including cider, property valuation services, and
packaged leaf salad. Twelve items were removed from the basket including men’s tracksuit
pants, video cameras, and car stereos.

The updated weights show that $24.23 of every $100 that households spent on goods and
services covered by the CPI is on housing and household utilities, compared with $23.55 in
2011. This reflects increased spending on housing rentals, property rates and related services,
and household energy.

The 2012/13 Household Economic Survey (HES) was the main source of information for the new
weights. However, because the HES does not provide accurate information for some goods and
services, we also used information from a range of other sources.

The updated weights are included in table 9 of this information release.

We also changed the way we weight regional price change to better align with international best
practice – by weighting it using expenditure in five broad regions. This means that price change
in regions with higher levels of expenditure per person (eg Auckland, which has a regional
expenditure share of 34.87 percent and makes up 33.37 percent of the population) will have a
bigger impact on the headline CPI. This change was recommended by the 2013 CPI Advisory
Committee. Before this change, regional price change was weighted using each region’s share
of the population.

We also reduced the number of regional centres that CPI prices are collected from – down from
15 to 12. This was to re-invest the cost of collection towards funding CPI-related initiatives such
as household living-costs price indexes for particular groups in society and seasonally adjusted
analytical CPI series, as recommended by the 2013 CPI Advisory Committee.

The regional expenditure weights are included in table 7 of this information release.

Frequency

3) Quarterly

Main users of the data

The CPI is used by the Reserve Bank of New Zealand to help set monetary policy and for monitoring economic performance. It is used by the government to adjust New Zealand Superannuation and unemployment benefit payments once a year, to help ensure that these payments maintain their purchasing power. Employers and employees use the CPI in wage negotiations.